National Association of Home Builders Discusses Economics and Housing Policy

Foreclosure Starts Rate Falls

The delinquency rate for first-lien mortgage loans on 1-4 unit residential properties decreased to a seasonally adjusted rate of 4.77% of all loans outstanding at the end of the fourth quarter of 2015, 22 basis points less than its level in the third quarter of 2015 and 91 basis points below its level one year ago. According to the report, released by the Mortgage Bankers’ Association, the delinquency rate has now reached its lowest level since the third quarter of 2006.

The 4-quarter decline in the share of mortgages past due, measured on a not seasonally adjusted basis, reflected a decline across each stage of delinquency. On a not seasonally adjusted basis, the percentage of all loans past due fell by 95 basis points over the year. Loans 30-59 days past due fell by 23 basis points, loans 60-89 days past due fell by 14 basis points, and loans 90 or more days past due decreased by 58 basis points.

At the same time, the foreclosure starts rate fell 10 basis points over the past year and now sits at .36%, its lowest level since the second quarter of 2003. Over 5 years, 2011 to the third quarter of 2015, the rate of foreclosure starts has been steadily declining. During the period including 2002 to 2005, the foreclosure starts rate remained low and relatively steady, however, it began a sustained climb beginning in 2006, peaking at 1.27% in 2010. Since peaking in 2010, the foreclosure starts rate of mortgages secured by 1-4 unit family homes has fallen and is now more closely aligned with the levels recorded prior to the crisis.

A previous post illustrated that the default rate on first-lien mortgages at smaller banks was typically less than the default rate at all depository institutions combined. Together, the default rate at the 20 largest depository institutions typically exceeded the default rate over all depository institutions. The default rate on first-lien mortgages is measured as the dollar value of net charge-offs, the amount charged-off net of recoveries, relative to the total outstanding amount of first-lien mortgages. While the net charge-off rate at smaller banks rose in tandem with the net charge-off rate at larger banks, the net charge-off rate on first-lien mortgages held at the comparatively smaller banks did not rise as fast or as high as the rate recorded by larger depository institutions during the crisis. However, by 2015, the net charge-off rate at both larger banks and smaller banks are now consistent with pre-crisis levels.

Not only was the net charge-off rate at smaller banks, many of them community banks, lower than the average rate at all depository institutions, but the net charge-off rates at credit unions are also comparatively low. However, while the net charge-off rate at depository institutions have returned to their pre-recession average level, the rate at credit unions remains moderately high relative to this time period.

Similar to the FDIC, the National Credit Union Association (NCUA) collects Call Reports, information on financial institutions’ balance sheet activity. While the FDIC collects this information from Depository Institutions, the reports obtained by the NCUA are collected from Federally Insured Credit Unions (FICUs). Figure 2 compares the net charge-off rates at all depository institutions and at all FICUs. According to the graph, net charge-off rates at both credit unions and at depository institutions were low and generally steady in the years preceding the Great Recession. However, net charge-off rates at both types of financial institutions began to rise noticeably in 2008. However, the peak rate of net charge-offs at depository institutions exceeded the peak rate at FICUs. According to Figure 2, the net charge-off rate at depository institutions peaked in 2009 at 1.47% while the peak rate recorded by FICUs was 0.39%, reached in 2011. In that year, the net charge-off rate at depository institutions was 1.01%.

The net charge-off rate at both depository institutions and at credit unions have receded in recent years. As of 2015, the net charge-off rate at depository institutions is similar to the rate of net charge-offs at credit unions. However, while the net charge-off rate at depository institutions in 2015 has returned to its pre-recession average level, the similar net charge-off rate that was recorded by credit unions in 2015 still exceeds the average rate experienced prior to the recession.